This Changes Everything at Netflix

Netflix is one step closer to knocking everybody else out.

I can't believe that everybody's going to let Netflix(Nasdaq: NFLX) get away with this.

The Los Angeles Times is reporting that the digitally prolific movie rental service is striking a deal with Epix to offer up its releases through Netflix's fast-growing streaming option.

Epix is the nascent premium digital television service bankrolled by Lionsgate(NYSE: LGF), MGM, and Viacom's (NYSE: VIA) Paramount. In other words, it may not be long before Netflix subscribers have streaming access to some of this year's big hits including Iron Man 2 and Dinner for Schmucks.

It won't come cheap. Netflix is apparently willing to fork over nearly $1 billion for licensing rights to stream the flicks over the next five years. However, that's the kind of payday that Epix can't turn down, even if title availability for Netflix members on unlimited plans at no additional cost will eat into its own subscriber-based offering.

It remains to be seen if there will be a release window here, along the lines of Netflix holding back on DVDs from certain studios during the first four weeks of their retail release.

In the end, this is the kind of deal that no one else can match.

Coinstar's (Nasdaq: CSTR) Redbox plans to unveil its digital strategy later this year, but it's likely to tiptoe into this niche. Blockbuster is strapped for cash. The tech darlings toiling away for years in digital distribution are focusing on elusive piecemeal rentals.

This could be a real game changer for Netflix. It has already inked deals with Relativity Media and Liberty Starz' (Nasdaq: LSTZA)Starz to get fresher content available through its streams, but this would make Netflix's lead in this niche practically insurmountable.

Who could scale this quickly? Nobody.

What does this mean for conventional movie channels including Time Warner's (NYSE: TWX) HBO? Toast.

The question will no longer be who can compete against Netflix digitally, but -- rather -- how is it going to go about carving up its empire.

Tiers for cheersThe only real knock of the Netflix model during its past few blowout quarters is that its subscriber base is growing faster than its top line. In other words, revenue per account keeps going down.

There's a simple explanation for this. New members are being wooed by the entry-level unlimited plan, where couch potatoes are allowed 24/7 streaming and can have a single DVD or Blu-ray out at a time. As more film buffs realize that they don't need to have three or more discs out at a time, they too will downgrade to the economical $8.99 monthly plan.

Netflix will have to do a lot of soul searching at this point. Does it let average revenue per user slide all the way down to $8.99, or does it do something about it by creating more digital value for its higher-priced offerings?

After all, we all know that the optical disc is dying. It's really just a matter of time. Do we really think that Netflix is going to settle for everyone flocking to the unlimited $8.99 plan?

I doubt it. What if some of the premium streaming content is reserved for those paying nearly twice as much for the flagship plan that offers three discs out at any given time? Not only would it translate into revenue per subscriber actually climbing for a change, but it would also give studios more leeway in licensing hot content to Netflix's higher tiers.

After all, studios don't mind Blockbuster or pay-per-view broadcasters renting out their releases because they are charging top dollar.

Poetry in motionIt's perfectly fitting that Netflix is only a handshake away from streaming Dinner for Schmucks at some point soon. The flick deals with corporate executives who compete to see who can bring the biggest idiot to a dinner party.

Let's face it, any rival that Netflix brings to the soiree is going to be a model idiot.

Netflix has pulled off this digital mastery in full view of its incompetent competition. As it brokered deals with TiVo(Nasdaq: TIVO), all three video game consoles, and various Blu-ray player and television manufacturers to allow streaming through their devices, everybody else was trying to get folks to pay up for individual rentals through their PCs.

With every content licensing deal that Netflix strikes, its digital catalog gets that much larger while everybody else is still either trying to make piecemeal rentals work, or trying to launch fledgling subscription services along the lines of Epix.

What did everybody else not see? Did they not catch on to the heady subscriber growth, pitted against their own piecemeal failures or tardy arrivals in the cinematic buffet line?

Netflix had this game won years ago when everyone else was paralyzed.

Will Netflix ever stop growing? What can stop the company? Share your thoughts in the comment box below.

Author

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.
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